Laws on Oral Contracts in California

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As it turns out, a handshake agreement on the West Coast can amount to a lot more than a handshake. Verbal contract law in California is a fairly straightforward affair, as far as legal matters go. In the Golden State, both oral and verbal contracts can be fully enforceable, but as is virtually always the case with state laws, there are certain exceptions to this rule.

In addition to these exceptions, which require particular types of contracts to be written, oral contracts come with a pretty major caveat: Rather than an existent document, the terms of the contract will need to be proven via verbal testimony if the contract is challenged in a court of law. Naturally, this makes the oral contract a fair bit murkier than the more concrete written variety.

California Verbal Contract: Definition

At its core, a contract essentially creates a sort of private law among the parties it binds, establishing agreed-upon terms, rights and responsibilities for both parties. If the participating parties fail to abide by a legally binding contract, they may be subject both to a lawsuit and the resulting consequences.

Regardless of whether the agreement is spoken or written, agreements must fulfill certain parameters to qualify as contracts in the state of California. These qualifying features include:

  • A meeting of the minds. What this common legal term means is that all parties must intend to enter the contract and that all parties most possess equal understanding of the terms of the agreement.
  • An offer and acceptance. This is exactly what it sounds like – for a contract to be a contract, one party has to make an offer, and another has to knowingly accept the terms of that offer. 
  • Something of value must be exchanged as part of the agreement. This exchange is known as “consideration” in legalese.  

What a contract is not, however, is something that is created every single time that people or parties agree to do something. The aforementioned requirements protect Californians from falling into contracts during their normal, everyday speech and affairs.

While most contracts are of the reliably written variety, contracts agreed upon by speech alone are known as verbal or oral contracts.

Enforceable Oral Contracts

Call them oral, verbal or “handshake” agreements, the meaning is the same. Contract law in California is made pretty clear in Section 1622 of the state’s Civil Code. In terms of the enforceability of oral contracts, the law states that “all contracts may be oral, except such as are specially required by statute to be in writing.”

Basically, California Civil Code contract law states that if an agreement or contract is valid and enforceable in other respects – such as possessing a meeting of the minds, containing an offer, and acceptance and facilitating the exchange of something of value – that agreement shall not be called invalid just because it lacks a note, memorandum or other written form.

However, the law requires “sufficient evidence” to indicate that the contract has been made if that contract is legally challenged. That’s where additional oral testimony may come into play.

How to Prove an Oral Contract

As the San Francisco lawyers at the Law Offices of Stimmel, Stimmel and Roeser write on their website: “It is axiomatic that it takes twice as long and costs three times as much to prove the terms of an oral contract rather than a written contract. A written contract is always preferable to an oral one.”

As ominous as that old axiom sounds, California law offers many circumstances that constitute “sufficient evidence” that a verbal or oral contract has been made. Evidence of electronic communication, including a recorded phone call or computer-generated transcript, may count as sufficient evidence, for instance.

Most commonly and most effectively, a neutral witness can serve as means of proving an oral contract in court. Ideally, this witness can confirm the existence of the agreement in question, and he or she may even provide some details as to the specific terms of the trade. In addition to this eyewitness, parties wishing to enforce a verbal contract in court may present evidence that they performed as agreed upon.

Exceptions: Contracts in Writing

So what about those contracts that the California Civil Code says “are specially required by statute to be in writing”?

For some types of contracts, California law expressly prohibits oral agreements. In these cases, courts will not enforce the terms of verbal, oral or otherwise unwritten contracts. As per Civil Code Section 1624(a), the following types of contracts must be in writing and subscribed to by the party or by the party’s legal representative to be charged:

  • Any agreement that is not planned to be performed within a year of the contract’s creation.
  • Any agreement that is not to be performed during the promisor’s lifetime.
  • A promise to answer for debt, default of miscarriage of another (with some exceptions detailed in Civil Code Section 2794).
  • Lease agreements spanning longer than one year.
  • Agreements for the sale of real estate or the sale or purchase of real estate interests. 
  • Employment agreements for real estate agents and brokers, or agreements authorizing such persons to buy, sell or lease real estate, or to introduce, seek or procure purchasers, sellers, lessees or lessors of real estate.
  • Agreements to pay debts secured by mortgages or deeds of trust upon purchased property (unless the assumption of debt is made clear in the conveyance of the real estate).
  • Any agreement made by those engaged in the lending or credit business to loan money or extend credit greater than $100,000, which is not to be used for family household or personal purposes.
  • Home improvement contracts between a property owner and contractor, as noted in California’s Business and Professions Code, Section 7159.

Well above California’s own jurisdiction, the United States Statute of Frauds requires other types of agreements to be written in order to be considered enforceable. There’s a bit of overlap among U.S. and California law here, as the contracts specified by the Statute of Frauds include marriage agreements, real estate property sales, transactions exceeding $500, agreements to pay debt for another person, and contracts for jobs expected to take longer than one year.

Read More: What is Contract Law?

Exception if a Party is Tricked from Creating a Written Contract

Here’s an interesting legal wrinkle in the realm of exceptions to oral contracts: In California, if one party tricks another party into not creating a written contract, state law specifically points out that a verbal contract may be legally enforced even when the contract is typically required to have been in writing.

To that point, Civil Code Section 1623 states, “Where a contract, which is required by law to be in writing, is prevented from being put into writing by the fraud of a party thereto, any other party who is by such fraud led to believe that it is in writing, and acts upon such belief to his prejudice, may enforce it against the fraudulent party.”

Additional Contract Exceptions

Verbal agreements in which one or more of the parties misunderstood the material terms are also invalid. In the same manner, vague and non-specific oral contracts aren’t enforceable as they often don’t even quality as contracts at all (for example, one person offhandedly telling another that he or she plans to buy something from another person at some time in the future).

Of course, verbal agreements that violate federal, state, or local law won’t fly – nor will written contracts of this nature, for that matter. Whether written or spoken, contracts are unenforceable if agreed upon under duress, while intoxicated, under onerous terms, or if there’s an extreme disparity in knowledge among parties. Also, if the party against whom enforcement is sought admits that a contract was made in court, the requirement for a written contract can be eliminated, per Civil Code Section 1624.

What About Implied Contracts?

Here’s another big exception to oral contract rules in California. Section 1619 of the state’s Civil Code makes a clear distinction between two types of agreements, known respectively as express contracts and implied contracts. Here’s how those two break down:

  • Express contract: This is essentially a typical variety of enforceable contract, in which the terms are clearly stated in words understood among the parties involved.
  • Implied contract: This is a contract that is inferred via the conduct of the parties involved, rather than explicitly stated. 

“Conduct” leaves a lot open to the interpretation of the judge or jury. In cases of implied contracts, it is ultimately up to the court to decide if action or inaction among the parties solidly indicates that a mutual understanding had been reached.

Breach of Oral Contract in California

If a party in a contract fails to act as agreed upon, a breach of contract may occur. Failure to act may be, for instance, a failure of one party to perform a required duty or failure of another party to pay a promised amount, as detailed in an oral or written agreement.

If one party fails to perform as per the contract’s terms, another party may file a lawsuit against them and – if the suit is successful – obtain damages as a legal remedy, among other results. In California, the statute of limitations for contracts is two years, under Section 339 of the California Code of Civil Procedure. This gives a plaintiff two years from the time that the oral contract was breached to bring a lawsuit against the defendant. In contrast, most written contracts have a statute of limitations of four years.

Availability of Monetary Damages

Monetary damages must be provable losses that resulted from the other party’s failure to perform. In other cases, the non-breaching party may simply decline to fulfill their part of the contract to the breaching party. Similarly, the non-breaching party may sue the breaching party to compel them to perform, basically forcing them to live up to the obligations expressed in the contract.

Damages or performance aren’t necessarily a guaranteed outcome, though. If the person or party who failed to perform has a legal justification for that failure, there’s no breach of contract. Life happens, after all, and the law in California accounts for that.

Tips

  • Oral contracts are enforceable in the State of California, with some exceptions in the realm of real estate, debt, large transactions and home improvements.

References

About the Author

As a freelance writer and small business owner with a decade of experience, Dan has contributed legal- and finance-oriented content to diverse sources including Chron, Fortune, Zacks.com, Motley Fool and MSN Money, among others.